Related Docket Nos. 2015 and 2060.
BRENDAN LINEHAN SHANNON, Bankruptcy Judge.
Before the Court are the (i) Debtors' Amended Second Omnibus (Substantive) Claims Objection
As discussed in detail below, the Court finds that the Walling Lease is valid and remains in effect, and that it allows for pooling of the mineral interests. As the 25-Acre Tract does not contain any wells, the only entitlement of the Parker Heirs to royalty payments is through the Walling Lease. The Court further finds that the Debtors have paid the Parker Heirs their royalty payments consistent with the provisions of the Walling Lease. As a result, the Court disallows the Parker Heir Claims in full. Furthermore, as the Parker Heir Claims are disallowed, the Court need not reach the Claims Reserve Motion as it is moot with respect to the Parker Heir Claims.
JURISDICTION AND VENUE
The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157(b)(1) and per the retention of jurisdiction provision embodied in the confirmed Global Settlement Joint Chapter 11 Plan of Reorganization of Samson Resources Corporation and its Debtor Affiliates (with Technical Modifications), Art. XI.
A. Background of Bankruptcy Case
On September 16, 2015 (the "Petition Date"), each of the Debtors filed a voluntary Chapter 11 petition in this Court. During the pendency of their Chapter 11 cases, the Debtors operated their businesses and managed their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. The Court entered a final order for joint administration of these Chapter 11 cases
On February 13, 2017, the Court entered an order
Also, on the Final Effective Date of the Plan,
B. Debtors' Business
The Debtors were an onshore oil and gas exploration and production company that owned royalty and working interests in various oil and gas leases primarily located in Colorado, Louisiana, North Dakota, Oklahoma, Texas and Wyoming. As of the Petition Date, the Debtors operated or had interests in approximately 8,700 oil and gas production sites, generating revenue through sales of oil and natural gas to wholesale buyers throughout the United States.
C. Procedural Background Related to Parker Heirs
The Parker Heirs have filed the following claims (collectively, the "Parker Heir Claims"):
All in, the Parker Heirs have filed claims totaling over $2 billion in the aggregate. The Debtors dispute any liability to the Parker Heirs, but the pendency of such large disputed claims had obvious ramifications for the Debtors' ability to file and obtain confirmation of a plan of reorganization under Bankruptcy Code § 1129.
Accordingly, on January 24, 2017, the Debtors filed the Debtors' Motion to Reclassify for All Purposes and Estimate for Voting Purposes Certain Claims Pursuant to the Solicitation Procedures
In order to make distributions to general unsecured claimants while the claims listed in the Estimation Motion remained unresolved, the Committee and the Debtors jointly filed the Claims Reserve Motion.
Thereafter, on February 28, 2017, the Debtors filed the Debtors' Amended Second Omnibus (Substantive) Claims Objection,
D. Background Related to Parker Heirs
At the heart of the Parker Heir Claims is a gas and mineral lease (the "Walling Lease"). To understand the Walling Lease, the Court must look back to a 255-acre tract of land in Texas originally owned by John and Anna Walling. After John Walling's death, Anna Walling conveyed 230 acres of land to B.F. Lewis in 1904 and retained the remaining 25 acres of land for herself.
i. Walling Lease
On October 1, 1957, Pat Walling and others executed an Oil Gas and Mineral Lease to Neal Woods, as lessee.
The Walling Lease permits "pooling" with other leases:
The 25-Acre Tract was pooled into two different units: (i) the Booth-Freeman Gas Unit ("Booth-Freeman Unit"), which is 702.91 acres in total and contains 19.16 acres of the 25-Acre Tract;
Although only 19.16 acres of the 25-Acre Tract is included in the Booth-Freeman Unit, a well drilled and producing in any part of the Booth-Freeman Unit will perpetuate the lease for the lease's entire 25 acres.
Once acreage is pooled, a royalty interest in the minerals produced in the pooled unit will be allocated by the amount of acres a royalty owner has within that pooled unit.
The Parker Heirs contend that the Walling Lease terminated because no wells were drilled in the pooled tract during the primary term of the Walling Lease. However, at trial, the Debtors produced the following evidence: (1) Permit to drill a well in the Booth-Freeman Unit (referred to herein as the "Booth-Freeman #1 Well") dated February 19, 1958,
In support of their position that no well was drilled in the primary term of the Walling Lease, the Parker Heirs produced a map, provided to them by the Debtors, of the Booth-Freeman Unit that depicted a number of wells drilled after 1962: the Booth-Freeman #1 Well was not shown on that map.
ii. Family Tree and Fractional Royalty Interests in 25-Acre Tract
Anna Walling had nine (9) children, 8 of whom survived Anna Walling. Thus, the 25-Acre Tract of land in Rusk County, Texas was divided among Anna Walling's 8 remaining children. One of Anna Walling's children, Pat Walling, received a one-eighth (1/8) interest in the 25-Acre Tract.
Upon Pat Walling's death, one-half (1/2) of his one-eighth (1/8) interest was inherited by his wife Catherine Walling (from whom Randolph Parker inherited his interest). Randolph Parker then conveyed (i) one-half (1/2) of his interest to National Locater Service, Inc. ("National Locater"),
Thus, based on the division order signed by Randolph Parker, after the transfer to National Locater, Randolph Parker owned a .0001065 royalty interest in the Booth-Freeman Unit.
iii. Other Mineral Owners of 25-Acre Tract
What happens if there is no valid Walling Lease? During the trial, this became a central question. The Debtors assert that if there is no valid Walling Lease, then the Parker Heirs would not be entitled to any royalties and even asserted that the Parker Heirs would be obliged to reimburse the Debtors for the royalty payments made to the Parker Heirs.
As stated above, there are no wells drilled on the 25-Acre Tract. Every royalty payment associated with the 25-Acre Tract results from the acres being pooled — whether in the Booth-Freeman Unit or the Sanders Unit. Further, the Court notes that there are many other holders of fractional royalty interests on that 25-Acre Tract. As noted above, Pat Walling was one of eight siblings who inherited any land or interests from Anna Walling. Although not at issue in these cases, Pat Walling's siblings also presumably conveyed their interests and now there are possibly hundreds of fractional royalty interest holders in the 25-Acre Tract claiming rights under the Walling Lease.
iv. The 69-Acre Tract
The Booth-Freeman Unit also contains a 69.9 acre tract of land ("69-Acre Tract") which is situated to the north of the 25-Acre Tract. The 69-Acre Tract was once owned by John and Anna Walling. After John's death, the 69-Acre Tract was part of the 230 acres sold by Anna Walling to B.F. Lewis in 1904.
The Debtors submitted various documents to support their position that Pat Waldron and Pat Walling/Waldon/Walden were different people. The Debtors' evidence is set forth in the below chart:
To summarize, the Debtors acknowledge the phonetic similarities between the names but point out that it is unlikely that Pat Walling would have engaged in significant land transactions at the age of 15, whereas Pat Waldron was married and in his 50's in 1913.
Interestingly, the Parker Heirs established that Pat Walling was listed in the census as a wage earner and laborer at the age of 12,
A. Standard of Review
When a claim objection is filed in a bankruptcy case, the burden of proof as to the validity of the claim "rests on different parties at different times." In re Allegheny Int'l, Inc., 954 F.2d 167, 173 (3d Cir. 1992). Bankruptcy Rule 3001(f) provides that a proof of claim executed and filed in accordance with the rules of procedure, i.e., includes the facts and documents necessary to support the claim, constitutes prima facie evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f). Pursuant to Bankruptcy Code § 502(a), a claim that is properly filed under Rule 3001 and Code § 501 is "deemed allowed" unless a party in interest objects. 11 U.S.C. § 502(a). "The objecting party carries the burden of going forward with the evidence in support of its objection which much be of a probative force equal to that of the allegations of the creditor's proof of claim." In re Kincaid, 388 B.R. 610, 614 (Bankr. E.D. Pa. 2008) (citing Allegheny, 954 F.2d at 173-74). If the objecting party succeeds in overcoming the prima facie effect of the proof of claim, the ultimate burden of persuasion then rests upon the claimant to prove the validity of the claim by a preponderance of the evidence. Id.
In this case, the Parker Heirs enjoy the benefit of the presumption embodied in Rule 3001 and section 502 of the Bankruptcy Code, and each of the Parker Heir Claims were deemed allowed upon filing. The Debtors have responded with competent evidence and arguments in opposition to each of the Parker Heir Claims. At trial, therefore, the burden lay with the Parker Heirs to prove the validity of the Parker Heir Claims by a preponderance of the evidence.
B. Discussion of Parties' arguments
The Parker Heirs assert four primary (and largely independent) arguments in support of their Claims: (i) the Walling Lease terminated and, thus, there is not a valid lease for the gas interests in the 25-Acre Tract; (ii) the Debtors have underpaid the Parker Heirs on their royalty interests; (iii) the Parker Heirs own an interest in the 69-Acre Tract;
In response, the Debtors insist that the Walling Lease is valid as the Booth-Freeman #1 Well was drilled and has continued in production through the primary lease portion of the Walling Lease, thereby perpetuating the Walling Lease. The Debtors also claim that the Parker Heirs have received all of their royalty interests in the 25-Acre Tract. Finally, the Debtors do not believe that the Parker Heirs can prove any valid interest in the 69-Acre Tract. As a result, the Debtors do not believe that any of the Parker Heir Claims are valid and they seek to have these claims disallowed and expunged. In the alternative, the Debtors assert that if the Parker Heirs indeed have any valid claim against the Debtors, such claims are general unsecured claims and must be reclassified as such.
C. Parker Heir Claims
i. The Walling Lease Did Not Terminate.
As mentioned above, paragraph 17 of the Walling Lease permitted pooling with other leases. Furthermore, the lessee's authority to pool is derived directly from the terms of the lease. As explained in Browning Oil Co., Inc. v. Luecke, 38 S.W.3d 625, 634 (Tex. App. 2000) (citations and footnotes omitted):
As evidenced at trial, on February 26, 1958, 19.16 acres of the 25-Acre Tract covered by the Walling Lease were pooled with other acreage to form the Booth-Freeman Unit. The Booth-Freeman Unit contains 702.91 acres.
The original lessee in the Walling Lease was Neal Woods. Carter Jones Drilling Company, Inc. became a successor in interest to Neal Woods. Pursuant to the Declaration of Gas Pooled Unit Carter-Jones Drilling Company, Inc., et al — Booth-Freeman Gas Pooled Unit No. 1
The record adduced at trial conclusively demonstrates that the Booth-Freeman #1 Well was completed on March 22, 1958, and began producing oil and gas at that time.
When the Parker Heirs were originally provided by the Debtors with a map of the Booth-Freeman Unit the Booth-Freeman #1 Well was not shown on the map.
The Sanders Gas Unit contains one well, the Sanders #1 well, which was completed on July 29, 1991. The Debtors do not operate the Sanders #1 well: Chisos operates this well. However, it continues to produce gas.
Production from the Booth-Freeman #1 Well is sufficient to perpetuate the Booth-Freeman Unit, as well as the Walling Lease, because production anywhere in the Booth-Freeman Unit constitutes production on the Walling Lease. Chambers v. San Augustine Cty. Appraisal Dist., 514 S.W.3d 420 (Tex. App. 2017) ("Production anywhere on a pooled unit is treated as production on every tract in the unit. Thus, all royalty interest owners in the land subject to the lease share in production no matter where the well is drilled on the leasehold. The lessor's royalty interest under a lease providing that lessor will have a fractional portion of the minerals produced is considered an interest in real property and is taxable as such." (citations omitted)).
Based upon the evidence and testimony described above, the Court finds that the Walling Lease has not terminated because the Booth-Freeman #1 Well was drilled within the primary period of the Walling Lease, began producing and continues in production. The Walling Lease did not terminate and remains in effect.
ii. The Parker Heirs Do Not Own Mineral Rights in the 69-Acre Tract.
As mentioned above, the Booth-Freeman Unit contains the 69-Acre Tract situated to the north of the 25-Acre Tract. The 69-Acre Tract was once owned by a Pat and Katie Waldron. The Parker Heirs claim that Pat Waldron and Pat Walling are the same person, which the Debtors dispute.
One source of confusion is a May 6, 1987, affidavit by Pat Walling's niece Doretha Moore, which states that Pat Walling changed his last name to Waldon, which was sometimes spelled Walden. Significantly, the affidavit does not mention the last name of Waldron.
As summarized above, the Debtors have produced affidavits of heirship, census records, and marriage and death records, to show that Pat Walling/Waldon is not the same person as Pat Waldron.
In addition, Randolph Parker signed a division order (as discussed in more detail below) acknowledging that he only owned a .0001065 interest in the Booth-Freeman Unit based on his interest in the 25-Acre Tract pursuant to the Walling lease.
The Parker Heirs, as noted above, have proposed some plausible theories concerning whether Pat Walling/Walden could possibly be the same as Pat Waldron. However, the Parker Heirs have the burden of proof regarding ownership of any royalty interests, and they needed to come into Court with evidence establishing their ownership interests in the 69-Acre Tract and rebutting the Debtors' evidence. This, they did not do. As such, the Court finds that the Parker Heirs do not possess any royalty interests in the 69-Acre Tract.
iii. The Debtors Do Not Owe the Parker Heirs a Larger Royalty Payment.
a. Division Order
A division order, as used in the oil and gas industry, is essentially a contract between the lessee and mineral interest owners (including royalty owners). The purpose of the document is to warrant and affirm the amount of each mineral interest owner's interest. The function of a division order is (i) to provide a procedure for distributing the proceeds from the sale of oil and gas by authorizing and directing to whom and in what proportion to distribute the sale proceeds and (ii) to protect the lessee from liability for improper payment of royalties. Neel v. Killam Oil Co., Ltd., 88 S.W.3d 334, 342 (Tex. App.-San Antonio 2002, pet. denied). As a condition for the payment of proceeds from the sale of oil and gas production to a mineral interest owner, a lessee is entitled to receive a signed division order from the mineral interest owner containing provisions set forth in Section 91.402 of the Texas Natural Resources Code.
Division orders are binding until revoked. Pan Am. Petroleum Corp. v. Long, 340 F.2d 211, 223 (5th Cir. 1964) (holding that "the law of Texas is that a division order is the operative instrument of transfer, whether called a contract or not, and until revoked is binding on the parties, who thereunder declare their present ability and intent to transfer, sell, or otherwise dispose of the oil to the pipeline, and their entitlement to payment for this same transfer."); Exxon Corp. v. Middleton, 613 S.W.2d 240 (Tex. 1981); Ohrt v. Union Gas Corp., 398 S.W.3d 315, 327 (Tex. App.-Corpus Christi 2012, pet. denied); see also TEX. NAT. RES CODE ANN. § 91.402(g). Texas law and the Walling Lease place the burden on the mineral interest owner to notify the Operator in writing of any change in ownership of an interest.
In Middleton, landowners brought suit to recover alleged deficiencies in royalty payments for natural gas production from wells. The division orders, which had been executed by the landowners, obligated the lessees to pay royalties at lesser rates than those required under the royalty clauses of the natural gas leases. The Supreme Court reiterated that under Texas law payments made and accepted under an agreement, such as the division orders in question, were effective until the agreement was revoked. Middleton, 613 S.W.2d at 250.
The Middleton decision solidified Texas' "binding-until-revoked rule." Following Middleton, both state and federal courts have found that royalty owners who execute division orders have waived any right to subsequently claim that larger payments are owed. See Bailey v. Shell Western E & P, Inc., 555 F.Supp.2d 767 (S.D. Tex. 2008); Neel v. Killam Oil Co., Ltd., 88 S.W.3d 334, (Tex. App.-San Antonio 2002, pet. denied) (if the royalty owners "had signed the new division orders and accepted one-sixteenth royalty payments under the new division orders, they would have waived their rights to the larger amount they claimed was owed to them"); Ohrt, 398 S.W.3d at 327 ("appellants were bound by the division orders because they accepted royalty payments based on the unit percentages under the division orders, and they did not revoke the division orders").
For example, in Bailey, the landowner executed 32 different division orders and accepted payments under them beginning in 1984. Bailey, 555 F. Supp. 2d at 773-74. Bailey first expressed discontent in a letter dated in 1990. For the next seven years, Bailey failed to make any additional complaint until after a lawsuit in 1997. The court found that the claimant consented to the treatment of which he complained and that the producers adhered to the instruments between themselves and the claimants. Based on this, the Court concluded that Bailey had waived his claim to larger royalty payments. Id. The same is true here.
After the transfer to National Locater, Randolph Parker signed a division order reflecting his .0001065 interest in the Booth-Freeman Unit. Later, after the Parker Heirs notified the Debtors of the change in ownership and provided evidence of such change, the Debtors sent the Parker Heirs several division orders (collectively, the "Division Orders") identifying the Parker Heirs' respective royalty interests.
The Parker Heirs assert claims seeking a larger portion of the revenues derived from production from the wells based on alleged ownership interests that are far larger than the ownership interests identified in the relevant Division Orders.
b. Sale to National Locater
The Parker Heirs also dispute Randolph Parker's sale of one-half of his interest to National Locater. The Debtors claimed that they have been unable to make payments to National Locater and thus, pursuant to Texas law, have been turning funds over to the Texas Unclaimed Property fund.
On May 4, 1987, Randolph Parker executed a Royalty Deed to National Locater, conveying half of his "undivided interest, in and to all of the oil royalty, gas royalty, and royalty in casinghead gas, gasoline, and royalty in other minerals in and under" the 25-Acre Tract.
The testimony at trial was as follows:
Based on the testimony and the royalty deed admitted into evidence at trial, the Court finds that Randolph Parker transferred one-half of his royalty interests to National Locater.
After the transfer to National Locater, Randolph Parker owned a .0001065 royalty interest in the Booth-Freeman Unit related to the 25-Acre Tract. As reflected in the Division Order signed by Randolph Parker,
The Debtors assert that they have been properly paying each of the Parker Heirs his or her share of the royalties on production from the Booth-Freeman Unit and the Sanders Unit. The Parker Heirs dispute that the Debtors properly accounted for their equal proportional share of their royalty interests.
At this stage of the proceedings, the Parker Heirs had the burden to establish the amount of their claims and to rebut the Debtors' records and evidence of proper, regular payments under the Walling Lease. Prior to the trial, the Parker Heirs employed Mary Ellen Denomy, an accountant who specializes in oil and gas, to develop the record regarding any errors in calculating the Parker Heirs' royalty payments. However, during trial, the Parker Heirs withdrew Ms. Denomy as a witness.
At trial, the Debtors presented the check details to each of the Parker Heirs
Thus, the only evidence presented at trial was that the Debtors complied with the written instructions of the Parker Heirs regarding their inheritance of Randolph Parker's royalty interest, that there are coherent business explanations for the different amounts received by each of the Parker Heirs, and that the Debtors have fully and properly paid the Parker Heirs for their fractional royalty interest.
The Court finds that the Debtors have paid the Parker Heirs all royalties earned in the ordinary course of the Debtors' businesses.
For the reasons set forth above, the Court finds that the Walling Lease has not terminated and remains in full force and effect, the Walling Lease provides for pooling, and the Parker Heirs have been paid their proportional royalties in the ordinary course of the Debtors' business. As such, the Parker Heirs have not met their burden by a preponderance of the evidence to support the Parker Heir Claims. The Court will
An appropriate order will issue.
May 2, 2017 Hr'g Tr. 157:1-15.
May 2, 2017 Hr'g Tr. 122:5-16 and 18-19. However, as the arguments regarding 69-Acre Tract were briefed and were not formally withdrawn, the Court will discuss the claims to the 69-Acre Tract herein.
Debtors Tr. Exh. 2 at p. 2.
May 1, 2017 Hr'g Tr. 147:1-148:25.
D.I. 2162, p. 6.
Debtors Tr. Exh. 15, p. 2 ("Change of Ownership") (The "you" and "your" reference in the division order refers to the operator, which in this case is the Debtors.). Furthermore, Texas statute dictates that a mineral owner must notify the lessee of any change in ownership. See Tex. Nat. Res. Code § 91.402(c)(1). "The division orders state that the signatures of appellants `[certify] the ownership of their decimal interest in production or proceeds as described' therein. They require lessors to notify in writing of any change in ownership, interest, or address." Ohrt, 398 S.W.3d at 330. Thus upon inheriting Randolph Parker's royalty interest under the Walling Lease, the Parker Heirs had the obligation to provide documentation to support the transfer of interest from Randolph Parker to the Parker Heirs.
May 2, 2017, Hr'g Tr. 135:15-23.
May 2, 2017 Hr'g Tr. 26:8-27:10.